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EX-32.01 - WILLIAMS CONTROLS INCi00050_ex32-01.htm
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EX-31.01 - WILLIAMS CONTROLS INCi00050_ex31-01.htm
EX-32.02 - WILLIAMS CONTROLS INCi00050_ex32-02.htm



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: December 31, 2010

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to

 

Commission file number 0-18083

 

Williams Controls, Inc.

(Exact name of registrant as specified in its charter)


 

 

Delaware

84-1099587

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

14100 SW 72nd Avenue,
Portland, Oregon

97224

(Address of principal executive office)

(zip code)


 

(503) 684-8600

(Registrant’s telephone number, including area code)


 

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

 

 

 

 

 

Large accelerated filer o

            Accelerated filer o

 

 

 

 

 

 

Non-accelerated filer o

Smaller reporting company x

 


 

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No x

The number of shares outstanding of the registrant’s common stock
as of January 31, 2011: 7,292,944



Williams Controls, Inc.

December 31, 2010

Table of Contents

 

 

 

 

 

 

 

 

 

Page
Number

 

 

 


Part I. Financial Information

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets, December 31, 2010 and September 30, 2010

1

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations, three months ended December 31, 2010 and 2009

2

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows, three months ended December 31, 2010 and 2009

3

 

 

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

18

 

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

19

 

 

 

 

 

 

 

Item 1A.

Risk Factors

19

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

19

 

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

19

 

 

 

 

 

 

 

Item 4.

Reserved

19

 

 

 

 

 

 

 

Item 5.

Other Information

19

 

 

 

 

 

 

 

Item 6.

Exhibits

19

 

 

 

 

 

 

 

Signature Page

21

 

 

 

 

 

 



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Williams Controls, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 


 


 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,539

 

$

3,016

 

Trade accounts receivable, net

 

 

8,717

 

 

8,854

 

Other accounts receivable

 

 

429

 

 

599

 

Inventories

 

 

8,161

 

 

7,512

 

Deferred income taxes

 

 

927

 

 

927

 

Prepaid expenses and other current assets

 

 

991

 

 

341

 

 

 



 



 

Total current assets

 

 

20,764

 

 

21,249

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

9,349

 

 

9,025

 

Deferred income taxes

 

 

3,553

 

 

3,493

 

Other assets, net

 

 

376

 

 

438

 

 

 



 



 

Total assets

 

$

34,042

 

$

34,205

 

 

 



 



 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,113

 

$

4,593

 

Accrued expenses

 

 

4,960

 

 

5,698

 

Current portion of long-term debt

 

 

250

 

 

 

Current portion of employee benefit obligations

 

 

212

 

 

212

 

 

 



 



 

Total current liabilities

 

 

9,535

 

 

10,503

 

 

 

 

 

 

 

 

 

Long-term Liabilities:

 

 

 

 

 

 

 

Employee benefit obligations

 

 

8,611

 

 

8,694

 

Other long-term liabilities

 

 

249

 

 

244

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred Stock ($.01 par value, 50,000,000 authorized) Series C (No shares were issued and outstanding at December 31, 2010 and September 30, 2010)

 

 

 

 

 

Common stock ($.01 par value, 12,500,000 authorized; 7,292,944 and 7,289,745 issued and outstanding at December 31, 2010 and September 30, 2010, respectively)

 

 

73

 

 

73

 

Additional paid-in capital

 

 

37,818

 

 

37,623

 

Accumulated deficit

 

 

(12,033

)

 

(12,677

)

Treasury stock (332,593 shares at December 31, 2010 and September 30, 2010)

 

 

(2,734

)

 

(2,734)

 

Accumulated other comprehensive loss

 

 

(7,477

)

 

(7,521

)

 

 



 



 

Total stockholders’ equity

 

 

15,647

 

 

14,764

 

 

 



 



 

Total liabilities and stockholders’ equity

 

$

34,042

 

$

34,205

 

 

 



 



 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

1


Williams Controls, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended
December 31,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Net sales

 

$

13,550

 

$

11,709

 

Cost of sales

 

 

9,269

 

 

8,123

 

 

 



 



 

 

 

 

 

 

 

 

 

Gross profit

 

 

4,281

 

 

3,586

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

1,184

 

 

1,056

 

Selling

 

 

671

 

 

658

 

Administration

 

 

1,547

 

 

1,345

 

 

 



 



 

Total operating expenses

 

 

3,402

 

 

3,059

 

 

 

 

 

 

 

 

 

Operating income

 

 

879

 

 

527

 

 

 

 

 

 

 

 

 

Other (income) expenses:

 

 

 

 

 

 

 

Interest income

 

 

(1

)

 

(4

)

Interest expense

 

 

9

 

 

5

 

Other expense, net

 

 

38

 

 

7

 

 

 



 



 

Total other expenses

 

 

46

 

 

8

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

833

 

 

519

 

Income tax expense

 

 

189

 

 

123

 

 

 



 



 

 

 

 

 

 

 

 

 

Net income

 

$

644

 

$

396

 

 

 



 



 

 

 

 

 

 

 

 

 

Net income per common share – basic

 

$

0.09

 

$

0.05

 

 

 



 



 

Weighted average shares used in per share calculation – basic

 

 

7,290,122

 

 

7,271,065

 

 

 



 



 

 

 

 

 

 

 

 

 

Net income per common share – diluted

 

$

0.09

 

$

0.05

 

 

 



 



 

Weighted average shares used in per share calculation – diluted

 

 

7,436,184

 

 

7,375,680

 

 

 



 



 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

2


Williams Controls, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended
December 31,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

644

 

$

396

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

560

 

 

524

 

Deferred income taxes

 

 

(59

)

 

(14

)

Stock based compensation

 

 

169

 

 

138

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Receivables, net

 

 

307

 

 

(250

)

Inventories

 

 

(649

)

 

(93

)

Prepaid expenses and other current assets

 

 

(650

)

 

(548

)

Accounts payable and accrued expenses

 

 

(1,257

)

 

(63

)

Other

 

 

18

 

 

70

 

 

 



 



 

Net cash provided by (used in) operating activities

 

 

(917

)

 

160

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(836

)

 

(372

)

 

 



 



 

Net cash used in investing activities

 

 

(836

)

 

(372

)

 

 



 



 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net borrowings on revolving loan facility

 

 

250

 

 

 

Net proceeds from exercise of stock options

 

 

26

 

 

12

 

 

 



 



 

Net cash provided by financing activities

 

 

276

 

 

12

 

 

 



 



 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(1,477

)

 

(200

)

Cash and cash equivalents at beginning of period

 

 

3,016

 

 

9,245

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

1,539

 

$

9,045

 

 

 



 



 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Income taxes paid

 

$

467

 

$

42

 

 

 



 



 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

3


Williams Controls, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months ended December 31, 2010 and 2009
(Dollars in thousands, except share and per share amounts)
(Unaudited)

Note 1. Organization and Basis of Presentation

          Williams Controls, Inc., including its wholly-owned subsidiaries as follows, is hereinafter referred to as the “Company,” “we,” “our,” or “us.”

          The following are the Company’s active wholly-owned subsidiaries: Williams Controls Industries, Inc.; Williams (Suzhou) Controls Co. Ltd.; Williams Controls Europe GmbH; and Williams Controls India Private Limited.

          In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2010. The results of operations for the three months ended December 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year.

          The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, based upon all know facts and circumstances, that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of issuance of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results may differ materially from these estimates. Estimates are used in accounting for, among other things, allowance for doubtful accounts, excess and obsolete inventory, useful lives for depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, pension and post-retirement medical benefit obligations, product warranty, share-based compensation expense, income taxes and commitments and contingencies.

          The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Note 2. Recently Adopted Accounting Standards

          In April 2010, the FASB issued authoritative guidance which established criteria for a milestone to be considered substantive and allows revenue recognition when the milestone is achieved in research and development arrangements. In addition, this guidance requires disclosure of certain information with respect to arrangements that contain milestones. This guidance was effective for the Company prospectively beginning October 1, 2010. The Company evaluated this guidance and does not expect its adoption to have a significant impact on the Company’s consolidated financial statements.

          In December 2008, the FASB issued authoritative guidance requiring employers to provide additional disclosures about plan assets of a defined benefit pension or other post-retirement plan. These disclosures include information detailing investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and an understanding of significant concentrations of risk within plan assets. This guidance was effective for the Company beginning in fiscal 2010 (October 1, 2009). This guidance was not required to be applied to earlier periods that are presented for comparative purposes and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Note 3. Cash and Cash Equivalents

          Cash and cash equivalents include highly liquid investments with original maturities of three months or less. At December 31, 2010, cash and cash equivalents primarily consisted of cash deposits held in one major U.S. financial institution. At December 31, 2010, approximately 23% of the Company’s cash and cash equivalents were held with one major financial institution in the United States with the remainder held in foreign banks or foreign currency denominated accounts. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. As of December 31, 2010, cash and cash equivalents held in the United States exceeded federally insured limits by approximately $100. The Company has not experienced any losses related to this cash concentration.

4


Note 4. Trade Accounts Receivable

          Trade accounts receivable are presented net of an allowance for doubtful accounts of $154 and $150 at December 31, 2010 and September 30, 2010, respectively. Activity related to the allowance for doubtful accounts for the three months ended December 31, 2010 and the full year ended September 30, 2010 consisted of the following:

 

 

 

 

 

 

 

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 


 


 

Beginning balance

 

$

150

 

$

246

 

Charges to bad debt expense

 

 

19

 

 

69

 

Write-offs, recoveries and adjustments, net

 

 

(15

)

 

(165

)

 

 



 



 

Ending balance

 

$

154

 

$

150

 

 

 



 



 

Note 5. Inventories

          Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 


 


 

Raw materials

 

$

6,039

 

$

5,767

 

Work in process

 

 

86

 

 

55

 

Finished goods

 

 

2,036

 

 

1,690

 

 

 



 



 

 

 

$

8,161

 

$

7,512

 

 

 



 



 

Note 6. Accrued Expenses

          Accrued expenses consist of the following:

 

 

 

 

 

 

 

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 


 


 

Environmental liability

 

$

893

 

$

900

 

Accrued product warranty

 

 

1,160

 

 

1,578

 

Accrued compensation and benefits

 

 

1,833

 

 

1,962

 

Income tax payable

 

 

305

 

 

522

 

Other

 

 

769

 

 

736

 

 

 



 



 

 

 

$

4,960

 

$

5,698

 

 

 



 



 

          For further discussion related to the Company’s environmental liability and product warranty liability, refer to Notes 14 and 7, respectively.

Note 7. Product Warranties

          The Company establishes a product warranty liability based on a percentage of product sales. The liability is based on historical return rates of products and amounts for significant and specific warranty issues, and is included in accrued expenses in the accompanying condensed consolidated balance sheets. Warranty is limited to a specified time period, mileage or hours of use, and varies by product, application and customer. The Company has recorded a liability, which in the opinion of management, is adequate to cover such warranty costs. Warranty payments can vary significantly from quarter to quarter and year to year depending on the timing of the settlement of warranty claims with various customers. Following is a reconciliation of the changes in the Company’s warranty liability for the three months ended December 31, 2010 and the year ended September 30, 2010.

5



 

 

 

 

 

 

 

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 


 


 

Beginning balance

 

$

1,578

 

$

751

 

 

Payments

 

 

(603

)

 

(557

)

Additional accruals

 

 

185

 

 

1,384

 

 

 



 



 

 

Ending balance

 

$

1,160

 

$

1,578

 

 

 



 



 

          The increase in payments during the three months ended December 31, 2010 primarily relates to warranty claim payments related to one customer, which were accrued during fiscal 2010.

Note 8. Debt

          In June 2010, the Company entered into a revolving loan facility with U.S. Bank, which expires on June 30, 2012. As of December 31, 2010, our balance on the revolving loan facility is $250.

          The revolving loan facility provides for $8,000 in borrowing capacity and is secured by substantially all the assets of the Company. Borrowings under the revolving loan facility are subject to a borrowing base equal to 75% of eligible accounts receivables and 50% of eligible inventories. Interest rates under the new agreement are based on the election of the Company of either a LIBOR rate or at Prime rate. Under the LIBOR rate option, the revolving loan facility will bear interest at the LIBOR rate plus 2.25% per annum for borrowings under the revolving loan facility. Fees under the loan agreement include an unused line fee of 0.15% per annum on the unused portion of the revolving loan facility.

          The Company had available under its revolving credit facility $5,778 at December 31, 2010.

Note 9. Comprehensive Income

          The following table summarizes the components of comprehensive income:

 

 

 

 

 

 

 

 

 

 

Three Months
Ended December 31,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Net income

 

$

644

 

$

396

 

Translation adjustment

 

 

43

 

 

 

Change of unrealized gain or loss

 

 

 

 

97

 

 

 



 



 

Comprehensive income

 

$

687

 

$

493

 

 

 



 



 

Note 10. Earnings Per Share

          Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares outstanding and the dilutive impact of common equivalent shares outstanding.

          Following is a reconciliation of basic EPS and diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
December 31, 2010

 

Three Months Ended
December 31, 2009

 

 

 


 


 

 

 

Income

 

Shares

 

Per
Share
Amount

 

Income

 

Shares

 

Per
Share
Amount

 

 

 


 


 


 


 


 


 

 

Basic EPS –

 

$

644

 

 

7,290,122

 

$

0.09

 

$

396

 

 

7,271,065

 

$

0.05

 

 

 



 



 



 



 



 



 

Effect of dilutive securities –
Stock options & restricted stock

 

 

 

 

 

146,062

 

 

 

 

 

 

 

 

104,615

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

Diluted EPS –

 

$

644

 

 

7,436,184

 

$

0.09

 

$

396

 

 

7,375,680

 

$

0.05

 

 

 



 



 



 



 



 



 

6


          For the three months ended December 31, 2010, the Company had options and restricted stock covering 240,322 shares that were not considered in the dilutive EPS calculation since they would have been antidilutive. For the three months ended December 31, 2009, the Company had options covering 364,784 shares not considered in the dilutive EPS calculation since they would have been antidilutive.

Note 11. Fair Value Measurement

          Financial assets and liabilities recorded at fair value in the consolidated balance sheet are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:

 

 

 

 

Level 1 –

observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

 

 

 

Level 2 –

inputs, other than the quoted market prices in active markets, which are observable, either directly or indirectly; and

 

 

 

 

Level 3 –

unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.

          The following table presents information about financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of
December 31, 2010

 

Level 1

 

Level 2

 

Level 3

 

 

 


 


 


 


 

 

Cash and cash equivalents

 

$

1,539

 

$

1,539

 

$

 

$

 

 

 



 



 



 



 

Total financial assets and liabilities

 

$

1,539

 

$

1,539

 

$

 

$

 

 

 



 



 



 



 

          There were no assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2010.

Note 12. Employee Benefit Plans

Pension Plans

          Disclosures regarding the components of net periodic benefit cost and contributions of pension plans are required for interim financial statement purposes and are included below:

Components of Net Periodic Benefit Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaried Employees Plan

 

Hourly Employees Plan

 

 

 


 


 

 

 

Three Months Ended
December 31,

 

Three Months Ended
December 31,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

Service cost

 

$

 

$

 

$

13

 

$

12

 

Interest cost

 

 

66

 

 

70

 

 

120

 

 

122

 

Expected return on plan assets

 

 

(51

)

 

(55

)

 

(81

)

 

(87

)

Amortization of prior service cost

 

 

 

 

 

 

3

 

 

3

 

Amortization of loss

 

 

34

 

 

33

 

 

50

 

 

45

 

 

 



 



 



 



 

Net periodic benefit cost

 

$

49

 

$

48

 

$

105

 

$

95

 

 

 



 



 



 



 

          During the three months ended December 31, 2010 and 2009, the Company contributed $146 and $71, respectively, to the pension plans. The Company expects total contributions to its pension plans for the remainder of fiscal 2011 to be $906.

7


Post Retirement Medical Plan

          Disclosures regarding the components of net periodic benefit cost and contributions of the Company’s post-retirement medical plan are required for interim financial statements and are included below. The Company did not make any contributions to the post-retirement medical plan for the three months ended December 31, 2010 and 2009.

Components of Net Periodic Benefit Cost:

 

 

 

 

 

 

 

 

 

 

Post-Retirement Plan
Three Months Ended
December 31,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Service cost

 

$

 

$

 

Interest cost

 

 

31

 

 

37

 

Amortization

 

 

(27

)

 

(25

)

 

 



 



 

Net periodic benefit cost

 

$

4

 

$

12

 

 

 



 



 

Note 13. Income Taxes

          The Company’s unrecognized tax benefits remained unchanged during the three months ended December 31, 2010. The Company believes that it is reasonably possible that unrecognized tax benefits could decrease by $69 within the 12 months of this reporting date.

          The Company’s subsidiary in China is entitled to a five-year tax holiday, pursuant to which it was exempted from paying the enterprise income tax for calendar year 2007, the year in which it first had positive earnings, and calendar year 2008. Additionally, the Company is eligible for reduced enterprise income tax rates of 10%, 11% and 12% for the calendar years 2009, 2010 and 2011, respectively. The income tax benefit of the tax holiday for the three months ended December 31, 2010 and 2009 were $46 and $85, respectively. The per share effect of the tax holiday on a fully diluted basis for the same periods was $0.01.

Note 14. Commitments and Contingencies

          The Company and its subsidiaries are parties to various pending judicial and administrative proceedings arising in the ordinary course of business. The Company’s management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of the Company’s insurance coverage, and the Company’s established liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on its review, the Company believes that any unrecorded liability that may result is not more than likely to have a material effect on the Company’s liquidity, financial condition or results of operations.

          The soil and groundwater at the Company’s Portland, Oregon facility contains certain contaminants, which were deposited from approximately 1968 through 1995. Some of this contamination has migrated offsite to neighboring properties. The Company has retained an environmental consulting firm to investigate the extent of the contamination and to determine what remediation will be required and the associated costs. During fiscal 2004, the Company entered into the Oregon Department of Environmental Quality’s voluntary clean-up program. As of December 31, 2010, the total liability recorded is $893 and is recorded in accrued expenses in the accompanying condensed consolidated balance sheet.

Note 15. Share Based Compensation

          The Company currently has two qualified stock plans: the 2010 Restated Stock Option Plan (the “Employee Plan”) and the 2010 Restated Formula Stock Option Plan for non-employee Directors (the “Formula Plan”). Under the terms of the Employee Plan, the Company may grant incentive stock options, non-qualified options, both of which must have an exercise price of not less than the fair market value on the date of grant, or restricted stock. Under the terms of the Formula plan, non-employee directors are each automatically granted 1,666 options at a price equal to the market value on the date of grant, which is the date of the Annual Meeting of Stockholders each year.

8


Stock Options

          Information regarding outstanding stock options as of December 31, 2010 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

Weighted
Average
Exercise Price

 

Weighted Average Remaining
Contractual Term

 

Aggregate
Intrinsic Value

 

 

 


 


 


 


 

Outstanding at September 30, 2010

 

 

874,777

 

$

9.17

 

 

6.5 years

 

$

1,342

 

 

 

 

 

 

 

 

 



 



 

Exercised

 

 

(3,199

)

 

7.97

 

 

 

 

 

 

 

Cancelled/Forfeited

 

 

(11,584

)

 

11.38

 

 

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

Outstanding at December 31, 2010

 

 

859,994

 

$

9.15

 

 

6.2 years

 

$

2,297

 

 

 



 



 



 



 

Exercisable at December 31, 2010

 

 

559,251

 

$

8.57

 

 

4.9 years

 

$

1,795

 

 

 



 



 



 



 

          The aggregate intrinsic value in the table above represents pre-tax intrinsic value that would have been realized if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price on that day. The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2009 was $769 and $749, respectively. The intrinsic value of all stock options exercised during the three months ended December 31, 2010 was $8 and the cash received from these exercises was $26. The intrinsic value of all stock options exercised during the three months ended December 31, 2009 was $8 and the cash received from these exercises was $12.

          The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued during the three months ended December 31, 2010 and 2009:

 

 

 

 

 

 

 

 

 

 

Three Months Ended
December 31,

 

 

 


 

 

 

2010(1)

 

2009

 

 

 


 


 

Expected term

 

 

 

 

6.5 years

 

Expected volatility

 

 

 

 

47

%

Risk-free interest rate

 

 

 

 

2.81

%

Expected dividend yield

 

 

 

 

0

%

Estimated average fair value per option granted

 

 

 

$

4.25

 


 

 

 

 

(1)

There were no stock options granted during the three months ended December 31, 2010.

Restricted Stock

          Information regarding outstanding restricted stock awards as of December 31, 2010 is as follows:

 

 

 

 

 

 

 

 

 

 

Shares

 

Weighted Average Grant Date Fair Value

 

 

 


 


 

 

Outstanding at September 30, 2010

 

 

 

$

 

Granted

 

 

30,200

 

 

10.75

 

 

 



 



 

Outstanding at December 31, 2010

 

 

30,200

 

$

10.75

 

 

 



 



 

Vested at December 31, 2010

 

 

 

$

 

 

 



 



 

          During the three months ended December 31, 2010, the Company issued 30,200 restricted shares to employees under the Employee Plan. These restricted shares vest over a four year period from the date of grant. No restricted stock was issued during the three months ended December 31, 2009.

9


Expense Information

          The Company’s share-based compensation expenses were recorded in the following expense categories for the three months ended December 31, 2010 and 2009:

 

 

 

 

 

 

 

 

 

 

Three Months
Ended December 31,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Cost of sales

 

$

34

 

$

28

 

Research and development

 

 

33

 

 

24

 

Selling

 

 

21

 

 

16

 

Administration

 

 

81

 

 

70

 

 

 



 



 

Total share-based compensation expense

 

$

169

 

$

138

 

 

 



 



 

 

 

 

 

 

 

 

 

Total share-based compensation expense (net of tax)

 

$

148

 

$

125

 

 

 



 



 

          As of December 31, 2010 there was $1,391 of total unrecognized compensation costs related to non-vested stock options and $274 related to non-vested restricted stock. The unrecognized compensation costs are expected to be recognized over a weighted average period of 2.9 years for non-vested stock options and 3.9 years for non-vested restricted stock.

Note 16. Enterprise-wide Information

          During the three months ended December 31, 2010 and 2009, the Company operated in two geographic reportable regions as shown in the table below.

 

 

 

 

 

 

 

 

 

 

Three Months Ended
December 31,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

Revenue – External Customers:

 

 

 

 

 

 

 

United States

 

$

12,695

 

$

11,145

 

China

 

 

855

 

 

564

 

 

 



 



 

 

 

$

13,550

 

$

11,709

 

 

 



 



 

Revenue – Intersegments:

 

 

 

 

 

 

 

United States

 

$

190

 

$

238

 

China

 

 

3,844

 

 

2,617

 

Other

 

 

130

 

 

190

 

Eliminations

 

 

(4,164

)

 

(3,045

)

 

 



 



 

 

 

$

 

$

 

 

 



 



 

Income before income taxes:

 

 

 

 

 

 

 

United States

 

$

287

 

$

371

 

China

 

 

665

 

 

241

 

Other

 

 

(119

)

 

(93

)

 

 



 



 

 

 

$

833

 

$

519

 

 

 



 



 

10



 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

(Dollars in thousands, except share and per share amounts)

Forward-Looking Statements

          This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements other than those that expressly connote an assertion of historical fact. Among others, this report includes forward looking statements that describe our plans and intentions regarding future courses of action and the possible outcomes of those intentions, and that set forth our expectations regarding our prospective financial condition, results of operations, and cash flows. Forward-looking statements can sometimes be identified by the use of forward-looking terminology, such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “continue,” “plans,” and “intends.” Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause us to deviate from our current plans, and could cause our actual results to differ materially from those indicated by the forward-looking statements. Some of the known factors that could cause us to deviate from current plans or could cause our results to fall short of expectations include: our ability to maintain positive relationships with key customers; the concentration of our sales revenues among a limited number of large customers; our status as a component manufacturer and the resulting impact on our revenues of demand for vehicles in which our products are installed; the effect of products liability lawsuits that directly affect us and that indirectly impact us because of their effect on the automotive and equipment industries generally; the impact of foreign currency exchange rates on our gross income; the impact of federal monetary and trade policies that impact the market for our products; and the status of our relationships with our employees and organized labor force. These risks and uncertainties are beyond our control and, in many cases; we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. Some of the factors that may cause our actual results in future periods to differ materially from those currently expected or desired because of a number of risks and uncertainties include, but are not limited to, those risks discussed in the section entitled “Risk Factors” in our annual report on Form 10-K for the fiscal year ended September 30, 2010.

          The forward-looking statements are made as of the date hereof, and, except as otherwise required by law, we cannot undertake to update or revise these statements.

Overview

          We primarily design, manufacture and sell electronic throttle controls, pneumatic controls and electronic sensors for heavy trucks, transit buses and off-road equipment. Electronic throttle controls send a signal proportional to throttle position to adjust the speed of electronically controlled engines. The use of electronically controlled engines is influenced primarily by emissions regulations, because these engines generally produce lower emissions. The original applications of electronic engines and electronic throttle controls were in heavy trucks and transit busses in the United States and Europe in the late 1980’s. As a result of the continuing implementation of more stringent emissions standards worldwide, demand for electronically controlled engines and electronic throttle control systems is expanding both geographically and into lower horsepower engines. China, India and Russia are implementing more stringent emissions standards for heavy trucks and transit busses, which we believe will increase the penetration of electronic throttle controls worldwide. Additionally, countries around the world have adopted emissions regulations that we expect will continue to increase the use of electronic throttle controls in off-road equipment. We also produce pneumatic controls and electronic hand controls, which are generally sold to the same customer base as our electronic throttle controls. These pneumatic products are used for vehicle control system applications such as power take-off’s, or PTO’s, and air-control applications. We believe that the demand for our products will be driven primarily by worldwide emissions legislation and the economic cycles for heavy trucks, transit busses and off-road equipment.

          As we move forward in fiscal 2011 and beyond, we plan to continue to work closely with our existing and potential customers to design and develop new products and adapt existing products to new applications, and to improve the performance, reliability and cost-effectiveness of our products.

Critical Accounting Policies and Estimates

          Management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, cost of sales and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our condensed consolidated financial statements.

11


Revenue Recognition

          Revenue is recognized at the time of product shipment, which is when title and risk of loss transfers to customers, and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable, and collection is reasonably assured. Revenues are reported net of estimated returns, rebates and customer discounts. Discounts and rebates are recorded during the period they are earned by the customer.

Product Warranty

          We provide a warranty covering defects arising from products sold. The product warranty liability is based on historical return rates of products and amounts for significant and specific warranty issues. The warranty is limited to a specified time period, mileage or hours of use, and varies by product, application and customer. The Company has recorded a warranty liability, which in the opinion of management, is adequate to cover such costs. While we believe our estimates are reasonable, they are subject to change and such change could be material.

Legal

          We are involved in various claims, lawsuits and other proceedings from time to time. Such litigation involves uncertainty as to possible losses we may ultimately realize when one or more future events occur or fail to occur. In connection with such claims and lawsuits, we estimate the probability of losses based on advice of legal counsel, the outcomes of similar litigation, legislative development and other factors. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates significantly. We expense legal expenses related to claims in the period incurred, including, in the case of expenses subject to contingencies, in the period in which we determine that it is probable that all remaining contingencies will be satisfied and the amount of such expenses have been established with reasonable certainty. A significant change in our estimates, or a result that materially differs from our estimates, could have a significant impact on our financial position, results of operations and cash flows.

Environmental Costs

          We estimate the costs of investigation and remediation for certain soil and groundwater contaminants at our Portland, Oregon facility. The ultimate costs to the Company for the investigation, remediation and monitoring of this site cannot be predicted with certainty due to the often unknown magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups and the evolving nature of cleanup technologies and governmental regulations. The Company has recognized a liability for environmental remediation costs for this site in an amount that management believes is probable and reasonably estimable. When the estimate of a probable loss is within a range, the minimum amount in the range is accrued when no estimate within the range is better than another. In making these judgments and assumptions, the Company considers, among other things, the activity to-date at the site and information obtained through consultation with applicable regulatory authorities and third party consultants and contractors. The Company regularly monitors its exposure to environmental loss contingencies. As additional information becomes known, it is at least reasonably possible that a change in the estimated liability accrual will occur in the near future.

Pensions and Post-Retirement Benefit Obligations

          Pension and post-retirement benefit obligations and net period benefit cost are calculated using actuarial models. The most important assumptions that affect these computations are the discount rate, expected long-term rate of return on plan assets, and healthcare cost trend rates. We evaluate these assumptions at least annually. Other assumptions involve demographic factors such as retirement, mortality and turnover. These assumptions are evaluated at least annually and are updated to reflect our experience. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

12


          Our discount rate assumption is intended to reflect the rate at which retirement benefits could be effectively settled based upon the assumed timing of the benefit payments. To determine our discount rate, we discount the expected benefit payments using the Principal Pension Discount Yield Curve. The equivalent level interest rate that produces the same present value of benefits is then determined. Our assumed rate does not differ significantly from this benchmark rate. To determine the expected long-term rate of return on pension plan assets, we consider the current asset allocations and the historical and expected returns on various categories of plan assets obtained from our investment portfolio manager. Our post-retirement plan does not contain any plan assets.

Share Based Compensation Expense

          We measure compensation cost for all outstanding unvested share-based awards, and awards we grant, modify, repurchase or cancel in the future, at fair value and recognize compensation over the requisite service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when calculating fair value including estimated stock price volatility, expected term and expected forfeitures. Factors considered in estimating forfeitures include the types of awards, employee class, and historical experience. Actual results may differ substantially from these estimates.

Income Taxes

          For each jurisdiction that we operate in, we are required to estimate our annual effective tax rate together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income and unless we believe that recovery is more likely than not, a valuation allowance is established. Our income tax provision on the consolidated statement of operations would be impacted by changes in the valuation allowance. This process is complex and involves significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against our net deferred tax assets.

13


Results of Operations
Financial Summary
(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
December 31,

 

 

 

 

 

 


 

 

 

 

 

 

2010

 

2009

 

Percent
Change
 

 

 


 


 



Net sales

 

$

13,550

 

$

11,709

 

 

15.7

%

Cost of sales

 

 

9,269

 

 

8,123

 

 

14.1

%

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

4,281

 

 

3,586

 

 

19.4

%

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,184

 

 

1,056

 

 

12.1

%

Selling

 

 

671

 

 

658

 

 

2.0

%

Administration

 

 

1,547

 

 

1,345

 

 

15.0

%

 

 



 



 




Operating income

 

$

879

 

$

527

 

 

66.8

%

 

 



 



 




 

 

 

 

 

 

 

 

 

 

 

As a percentage of net sales:

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

68.4

%

 

69.4

%

 

 

 

Gross margin

 

 

31.6

%

 

30.6

%

 

 

 

Research and development

 

 

8.7

%

 

9.0

%

 

 

 

Selling

 

 

5.0

%

 

5.6

%

 

 

 

Administration

 

 

11.4

%

 

11.5

%

 

 

 

Operating income

 

 

6.5

%

 

4.5

%

 

 

 

          Net sales increased to $13,550 for the first quarter of fiscal 2010. Although we have continued to see improvement from our low point in the third fiscal quarter of 2009, the heavy truck industry is still significantly below levels prior to the economic downturn with our first quarter sales run rate being approximately 18% below fiscal 2008 sales levels. While we continue to closely monitor all of our costs, we remain committed to spending on new product development and technology for existing and new customers. Management believes that it is likely that our $1,539 in cash plus available borrowing of $5,778 under our revolving loan facility will be adequate to sustain the Company throughout the fiscal year.

Comparative – Three months ended December 31, 2010 and 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent
Change

 

 

 

 

 

 

 

 

 


 

For the Three Months Ended December 31:

 

2010

 

2009

 

2009 to 2010

 


 


 


 


 

Net sales

 

$

13,550

 

$

11,709

 

 

15.7%

 

          Net sales increased $1,841 in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The increase in sales results from volume increases primarily in the Asian and European truck markets and to a lesser extent in the NAFTA truck market. Each market benefited from the general increase in the condition of the global economy. Asian truck sales increased 47% over the comparable period for the prior fiscal year primarily due to increased sales volumes of heavy trucks and off-road vehicles in China and heavy trucks in India. We believe the increases are the result of adoption of more stringent emissions standards, which mandate the inclusion of electronic throttle controls on new vehicles, and a higher percentage of vehicles in Asia converting to electronic throttle controls, thus allowing us to expand our customer base in this market. European truck sales improved 57% over the same period in fiscal 2010 due to our European customers increasing their heavy truck and off-road build rates. In addition, European sales were low during the first quarter of fiscal 2010 as these customers were working through high inventory levels from fiscal 2009. NAFTA truck sales increased 10% when compared to the first quarter of fiscal 2010 due to the continued improvements in the economic environment. Off-road sales to Asian customers improved 54% for the quarter ended December 31, 2010, while off-road sales to NAFTA customers remained flat between the comparable quarters..

          We expect that electronic throttle control sales generally will continue to vary directly with future changes in the overall economy and the demand for heavy trucks, transit buses and off-road vehicles in particular. These variations are largely dependent upon, and are expected to vary directly with, production volumes in the various geographic markets in which we serve. Additionally, competitive pricing may reduce margins and gross sales.

14


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

 

 

 

 

 

 

 

 


 

For the Three Months Ended December 31:

 

2010

 

2009

 

2009 to 2010

 


 


 


 


 

Cost of sales

 

$

9,269

 

$

8,123

 

 

14.1%

 

          The types of expenses included in cost of sales include raw materials, freight and duties, warranty, wages and benefits, depreciation and amortization, production utilities, shipping and production supplies, repairs and maintenance, production facility property insurance, and other production overhead. As a percent of sales, cost of sales decreased primarily due to higher sales volumes across which we can distribute fixed overhead costs. Component and raw material costs were lower in the first quarter of fiscal 2011 as we have been able to transition to a lower pricing structure for some of our new products as volumes begin to increase. Although freight and duty costs were up slightly on a quarter over quarter basis, they were in line with increased sales volumes. Warranty costs were down $67 quarter over quarter. In addition, wage related expenses increased in the first quarter of fiscal 2011 as the first quarter of fiscal 2010 included temporary salary reductions as part of the cost reductions put into place during the latter part of fiscal 2009. Full wages were reinstated during the second quarter of fiscal 2010.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent
Change

 

 

 

 

 

 

 

 

 


 

For the Three Months Ended December 31:

 

2010

 

2009

 

2009 to 2010

 


 


 


 


 

Gross profit

 

$

4,281

 

$

3,586

 

 

19.4%

 

          Gross profit was $4,281, or 31.6% of net sales in the first quarter of fiscal 2011, an increase of $695 compared to the gross profit of $3,586, or 30.6% of net sales, in the comparable fiscal 2010 period.

          The increase in gross profit in the first quarter of fiscal 2011 is primarily driven by the 15.7% net increase in sales of electronic throttle systems to our heavy truck and off-road customers. When comparing the first quarter of fiscal 2011 with the comparable period in fiscal 2010, manufacturing overhead costs were up in actual dollar value, but were relatively flat as a percentage of sales.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent
Change

 

 

 

 

 

 

 

 

 


 

For the Three Months Ended December 31:

 

2010

 

2009

 

2009 to 2010

 


 


 


 


 

Research and development

 

$

1,184

 

$

1,056

 

 

12.1%

 

          Research and development expenses increased $128 for the first quarter of fiscal 2011 compared to the comparable period in fiscal 2010. The Company’s research and development expenditures generally fluctuate based on the programs and products under development at any given point in time, and that fluctuation often does not coincide with sales cycles. Part of the increase in research and development expenses relates to wage expenses in the first quarter of fiscal 2011 being higher than the first quarter of fiscal 2010 as that quarter was the last quarter to include temporary salary reductions as part of the cost reductions put into place during the latter part of fiscal 2009. In addition, research and development expenses increased as we continue to have a record number of engineering projects under development and to meet the higher demand, we have added three additional engineers who are working on customer-specific projects. Overall, we expect research and development expenses for fiscal year 2011 to increase slightly over fiscal 2010 levels due to additional new product design projects.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent
Change

 

 

 

 

 

 

 

 

 


 

For the Three Months Ended December 31:

 

2010

 

2009

 

2009 to 2010

 


 


 


 


 

Selling

 

$

671

 

$

658

 

 

2.0%

 

          Selling expenses for the first fiscal quarter of 2011 were up slightly when compared with the same period for fiscal 2010. The increase is the result of increased sales commission related to the increased sales volumes in the quarter and increased wages expenses as the first quarter of fiscal 2010 included temporary salary reductions. Offsetting some of these increases were overall reductions in travel expenses during the first fiscal quarter of 2011.

15



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent
Change

 

 

 

 

 

 

 

 

 


 

For the Three Months Ended December 31:

 

2010

 

2009

 

2009 to 2010

 


 


 


 


 

Administration

 

$

1,547

 

$

1,345

 

 

15.0%

 

          Administration expenses for the first quarter of fiscal 2011 increased $202 when compared with the same period in fiscal 2010. The increase in administration expense includes increased wage expenses related to filling positions left vacant during the economic downturn as well as the first quarter of fiscal 2010 including temporary salary reductions as part of the cost reductions put into place during fiscal 2009 in response to the economic downturn. In addition, other increases in administration expenses included recording $150 related to professional service fees in the first quarter of fiscal 2011, increases in travel expenses and costs associated with our India facility which was opened during the third quarter of fiscal 2010. Offsetting these increases were reductions in legal fees of $227, as the first quarter of fiscal 2010 included legal fees associated with the Cuesta class action lawsuit, which was settled during the latter part of fiscal 2010.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent
Change

 

 

 

 

 

 

 

 

 


 

For the Three Months Ended December 31:

 

2010

 

2009

 

2009 to 2010

 


 


 


 


 

Income tax expense

 

$

189

 

$

123

 

 

53.7%

 

          Income tax expense reflects an effective tax rate of 22.7% for the quarter ended December 31, 2010 compared to an effective tax rate of 23.7% for the quarter ended December 31, 2009. The effective tax rate fluctuations are primarily due to the jurisdictions in which pretax income is earned and income tax rate differences between the domestic and foreign jurisdictions. The decrease in tax rate between quarters is also due in part to the extension of the federal research credit during December 2010.

Financial Condition, Liquidity and Capital Resources

          At December 31, 2010, we had cash and cash equivalents of $1,539. During the third quarter of fiscal 2010, the Company entered into a revolving loan facility with U.S. Bank and as of December 31, 2010 we had $5,778 available under such revolving loan facility. We believe our cash on hand and our capacity under the new revolving loan facility will be sufficient to meet our working capital needs throughout the fiscal year.

          The first quarter of fiscal 2011 operating activities used cash of $917, whereas the first quarter of fiscal 2010 generated cash from operating activities of $160. Net income plus non cash charges for depreciation and stock based compensation contributed $1,373 in the first quarter of fiscal 2011 compared to $1,058 in the first quarter of fiscal 2010.

          Changes in working capital items used cash of $2,231 in the first quarter of fiscal 2011 compared to a use of cash of $884 in the first quarter of fiscal 2010. Changes in receivables for the first quarter of fiscal 2011 generated cash of $307 compared to a use of cash of $250 in the first quarter of fiscal 2010. The change in receivables between quarters is primarily the result of changes in sales volumes between the respective prior quarters. Seasonal lower shipping days in our first fiscal quarter of 2011 resulted in sales volumes decreasing in the first quarter of fiscal 2011 when compared to the fourth quarter of fiscal 2010, which drove a generation of cash from collection on the higher sales. Sales in the first quarter of 2010 increased over sales in the fourth quarter of fiscal 2009, due to truck markets beginning to recover from depressed levels in fiscal 2009, resulting in an increase in accounts receivable. Inventories increased $650 in the first quarter of fiscal 2011 from the fourth fiscal quarter in 2010 compared to an increase of $93 in the first quarter of fiscal 2010 from the fourth fiscal quarter in 2009. The fiscal 2011increase primarily relates to increasing inventory levels in line with anticipated sales volumes increases throughout fiscal 2011 as compared to fiscal 2010. Accounts payable and accrued expenses decreased in the first quarter of fiscal 2011 from the fourth fiscal quarter in 2010, primarily due to timing of payments on accounts payable, increased seasonal payments over the fourth fiscal quarter of 2010 and a reduction in our warranty provision of $392 related to payments to one customer for prior warranty claims. Cash flows from operations for the three months ended December 31, 2010 included payments to our pension plans of $146 compared to $71 for the three months ended December 31, 2009. We believe it is likely we will generate positive cash from operations during fiscal 2011, however, depending on the continued uncertainty in the world-wide economic market, we could experience additional periods of negative cash flow from operations.

16


          Cash used in investing activities was $836 for the three months ended December 31, 2010 and $372 for the three months ended December 31, 2009 and was comprised solely of purchases of equipment for both periods. We expect our cash use for investing activities to increase throughout fiscal year 2011 as we continue to make purchases of capital equipment. We currently anticipate spending approximately $4,200 in capital expenditures for fiscal 2011. This is a higher capital spending level than what we experienced last year as we have a number of new projects and we are expanding our test and development facilities to handle the increased activity. In addition, with the opening of our Pune, India manufacturing facility, we will incur higher than normal capital expenditures during the fiscal year.

          Cash generated from financing activities was $276 for the quarter ended December 31, 2010, compared to $12 for the quarter ended December 31, 2009. Cash generated from financing activities for the first quarter of fiscal 2011 primarily relates to net borrowings on our revolving loan facility of $250 and proceeds from the exercise of stock options of $26. Cash generated from financing activities for the first quarter of fiscal 2010 relates to proceeds from the exercise of stock options.

Contractual Obligations as of December 31, 2010

          At December 31, 2010, our contractual obligations consisted of operating lease obligations and a license agreement. We did not have any material letters of credit, or debt guarantees outstanding at December 31, 2010. Maturities of these contractual obligations consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

 


 

 

 

Total

 

Less than
1 year

 

1 – 3
years

 

3 – 5
years

 

 

 


 


 


 


 

Operating leases

 

$

1,409

 

$

715

 

$

694

 

$

 

MMT license - minimum royalties

 

 

257

 

 

57

 

 

150

 

 

50

 

 

 



 



 



 



 

 

 

$

1,666

 

$

772

 

$

844

 

$

50

 

 

 



 



 



 



 

          Certain liabilities, including those related to our pension and post-retirement benefit plans, are reported in the accompanying condensed consolidated balance sheets but are not reflected in the table above due to the absence of stated maturities. We have net obligations at December 31, 2010 related to our pension plans and post-retirement medical plan of $6,282 and $2,541, respectively. We funded $146 to our pension plans during the first quarter of fiscal 2011 and $71 during the first quarter of fiscal 2010. We expect to make payments to our pension plans of $906 throughout the rest of fiscal 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and changes in the market value of investments.

Interest Rate Risk

          The Company has a revolving loan facility with U.S. Bank, which expires on June 30, 2012.

          As of December 31, 2010, there was an outstanding balance of $250 on the revolving loan. The Company does not believe a hypothetical 10% change in end of period interest rates or changes in future interest rates on these variable rate obligations would have a material effect on its financial position, results of operations, or cash flows. The Company has not hedged its exposure to interest rate fluctuations.

Foreign Currency Risk:

          We sell our products to customers in the heavy truck, transit bus and off-road equipment industries. For the three months ended December 31, 2010 and 2009, the Company had foreign sales of approximately 49% and 42% of net sales, respectively. All worldwide sales in the first three months of fiscal 2011 and 2010, with the exception of $855 and $564, respectively, were denominated in U.S. dollars. We have a manufacturing facility in Suzhou, China and sales offices in Shanghai, China and Munich, Germany and during fiscal 2010, we established a manufacturing facility in Pune, India. We purchase components internationally for use in both our products whose sales are denominated in U.S. dollars and other currencies. Although the Company is expanding its international exposure, it does not believe that changes in future exchange rates would have a material effect on its financial position, results of operations, or cash flows at this time. As a result, the Company has not entered into forward exchange or option contracts for transactions to hedge against foreign currency risk. The Company will continue to assess its foreign currency risk as its international operations, international purchases and sales increase.

17


Investment Risk:

          The Company does not use derivative financial or commodity instruments. The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and long-term obligations. The Company’s cash and cash equivalents, accounts receivable and accounts payable balances are short-term in nature, and, thus, the Company believes they are not exposed to material investment risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

          The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

          There has been no change in the Company’s internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

          Internal control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.

18


PART II – OTHER INFORMATION

Item 1. Legal Proceedings

          We are a party to various pending judicial and administrative proceedings arising in the ordinary course of business. Our management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of our insurance coverage, and our established liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on our review, we believe that any unrecorded liability that may result is not likely to have a material effect on our liquidity, financial condition or results of operations.

Item 1A. Risk Factors

          There have been no significant changes in risk factors for the quarter ended December 31, 2010. See the information set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Reserved

Item 5. Other Information

None

Item 6. Exhibits

 

 

 

Exhibit
Number

 

Description


 


 

 

 

3.01(a)

 

Certificate of Incorporation of the Registrant, as amended (Incorporated by reference to Exhibit 3.01 (a) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006)

 

 

 

3.01(b)

 

Certificate of Amendment to Certificate of Incorporation of the Registrant, dated February 27, 1995 (Incorporated by reference to Exhibit 3.01 (b) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006)

 

 

 

3.01(c)

 

Certificate of Amendment to Certificate of Incorporation of the Registrant, dated October 28, 2004 (Incorporated by reference to Exhibit 3.01 (c) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006)

 

 

 

3.01(d)

 

Certificate of Amendment to Certificate of Incorporation of the Registrant, dated February 22, 2005 (Incorporated by reference to Exhibit 3.01 (d) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006)

 

 

 

3.01(e)

 

Certificate of Amendment to Certificate of Incorporation of the Registrant, dated March 2, 2006 (Incorporated by reference to Exhibit 3.01 (e) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006)


19



 

 

 

3.02

 

Restated By-Laws of the Registrant as amended July 1, 2002 (Incorporated by reference to Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q, Commission File No. 000-18083, for the quarter ended June 30, 2002)

 

 

 

31.01

 

Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith)

 

 

 

31.02

 

Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith)

 

 

 

32.01

 

Certification of Patrick W. Cavanagh Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

 

 

 

32.02

 

Certification of Dennis E. Bunday Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

20


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

WILLIAMS CONTROLS, INC.

 

 

 

 

Date: February 9, 2011

/s/ PATRICK W. CAVANAGH

 

 


 

 

Patrick W. Cavanagh

 

 

President and Chief Executive Officer

 

 

 

 

Date: February 9, 2011

/s/ DENNIS E. BUNDAY

 

 


 

 

Dennis E. Bunday

 

 

Chief Financial Officer

 

21